I just love talking with other investors. Nothing is better than sharing ideas, trades, and market theories with like minded souls. However, in my experience, I have noticed a disturbing trend. That trend is that many investors are woefully uninformed when it comes to several basic market facts.  This is particularly true for income investors who are searching for the best monthly dividend payers.

The most basic concepts such as yield are often not correctly understood by even successful income investors.

Let’s take a closer look at yield.

Yield and the dollar figure of dividends are two different things.  Yield is calculated by by dividing the annual dividend per share by the share price.  This number tells the investor what percentage per year the dividend produces.

As you can see, the lower the share price, the higher the yield.  This is a classic dividend trap that catches many investors.  The stock price can be plunging and this pushes the dividend yield higher.  The high yield attracts greedy and unknowing investors who buy on yield alone.  Many times the falling stock price completely counteracts the steadily increasing yield resulting in overall losses for the investor.

The key to avoid this inherent issue with yield is to stick with growing companies with a long history of dividend increases.